Clawback Policy Advice to Thwart Off Future Headaches

As companies revise clawback policies to be Dodd-Frank compliant and develop recoupment procedures in the event of a financial restatement, Willis Towers Watson offers some observations to help companies strike a balance in their written policies that would maximize their ability to collect the necessary earnings while minimizing future disputes with executives.

• Include an expansive “means of recovery” provision. The SEC supports multiple ways of collecting repayment, including cancelling unvested awards, offsets against nonqualified deferred compensation and withholding dividends on company stock owed to an executive officer in a “reasonably promptly” manner. Therefore, policies should include a clause that permits the board to ability to use broad discretion in the type of compensation that can be used (both previously earned and “in-flight” awards reasonably expected to be earned). WTW recommends an expansive list of sources along with the caveat of “any other recovery action that is determined to be appropriate.”  Without this specific language, executives may contest recoupment from these award types.
  
  
•  Don’t rely on the “impracticality” provision. While it may be nearly impossible to recoup earnings from a terminated officer who has no future payments to draw funds, companies should not rely on this “out” for current officers. The impracticality clause includes exceptions when ERISA or home country law prohibits recoupment or when the cost of collecting the money exceeds the clawback amount. Asserting impracticality means the company must publicly file a detailed listing of their recovery efforts along with the associated costs and/or a legal explanation of why the clawback is legally prohibited.
  
  
• Build in a process that allows for dialogue on the recoupment approach. Although companies will want to demonstrate their strict and expeditious compliance to the rule, the situation may be less contentious by having a discussion between the board and the impacted executive before demand letters are sent or future legal actions initiated. This meeting can give the board the opportunity to review the payback calculation methodology (which may likely be a point of disagreement) and discuss the proposed and preferable means of recovery in a less adversarial way.
  
  
• Ensure the clawback policy permits an independent third party to perform calculations. Most committee charters may already provide for this, but it is prudent to ensure the clawback policy includes a stand-alone provision for boards to hire experts specifically to perform these calculations and that these consultants may be different than the independent compensation advisor.
  
  
• Finally, don’t narrow the scope of your policy with too detailed explanations of the listing requirements or define incentive pay more specifically than the listing exchange requirements.

Related plan documents will need to be amended and all award agreements should include a clawback acknowledgement so there are no inconsistencies. It is also advised to think through which committee administers the clawback and who communicates when a restatement is required and amend board and committee charters accordingly.